In this edition of the Demystifying ESG Webinar Series, Beatriz Araujo, Senior Counsel, Head of Corporate Governance at Baker McKenzie, Isabel Carty, Senior Associate at Baker McKenzie and Peter O’Byrne, Natura & Co Group IP director and The Body Shop General Counsel discuss diversity and how it can support the board in its role. Peter also shares some exciting initiatives of The Body Shop International Board as they relate to the role of diversity in corporate governance.
- The current regulatory landscape
- Status of diversity areas and key initiatives
- The Body Shop
- The Body Shop’s approach stakeholder governance
- Board composition and related initiatives
Boards are tasked with ensuring the company has a clear purpose, strategic direction, a sustainable risk appetite and a culture and values that will ensure delivery of each of these. They also must promote a culture and values that will ensure delivery of purpose and strategy. And the board will provide management with oversight as management looks to implement this agenda. This webinar considered one of the central pillars of corporate governance, namely, board composition, a critical tool in ensuring good decision making.
The current regulatory landscape
First we considered the current regulatory landscape regarding diversity and board composition.
In relation to Public Listed Companies, there are no quotas for board diversity; instead, the requirements fall within:
- Section 3 of the UK Corporate Governance Code (which applies to UK incorporated companies with a premium listing), which sets out recommendations in relation to board diversity which must be followed on a comply or explain basis. This means these companies would have to follow recommendations such as those set out in Section 3 of the Code, or provide an explanation as to why they have not followed the recommendations.
- The Listing Rules, which require a company to include, on a comply or explain basis, a statement in their annual financial report as regards certain diversity targets set by the Financial Conduct Authority.
- The disclosure and transparency rules that apply to most companies listed on the LSE (the Disclosure Guidance and Transparency Rules (DTR)) which require companies to include their diversity policy in their corporate governance statement and, more recently, require enhanced disclosure regarding ethnicity, sexual orientation, disability and socio-economic background in relation to board composition.
While public companies have historically been the focus in relation to governance reporting, the regulatory landscape in relation to private companies isan evolving area. For example, very large private companies must produce a corporate governance arrangement statement on an apply or explain basis under the Miscellaneous Reporting Regulations 2018. Companies complying with this requirement using the Wates Principles as their code will comment on board composition pursuant to Principle 2. This principle recognises that effective board composition requires an balance of backgrounds, experience and knowledge.
Status of diversity areas and key initiatives
In relation to gender, the representation of women on FTSE 100 boards is 39.6% and on FTSE 250 boards it is 38.9%.1 However, recently the Financial Times found that only 36% of women on FTSE 100 boards hold an executive position (and this drops to just 10% of women on FTSE 350 boards). There are a number of initiatives which seek to improve the representation of women such as the Hampton-Alexander review, which started in 2016 to cover listed companies but which now also covers large private companies.
Race and ethnicity is another key area of diversity. There has been an increased focus on this area following the Black Lives Matter movement and currently 16% of directors of FTSE 100 boards represent people from minority ethnic groups. There are also a number of initiatives in this area seeking to increase such representation, such as ‘At Least One by 21’, which aims to ensure at least one board member on each board is from a minority ethnic group.
Furthermore, areas of diversity which are historically under-reported are coming to the forefront, such as reporting on LGBTQ+ representation on boards. Initiatives such as ‘Quorum, Out Leadership’ are trying to increase LGBTQ+ representation on boards, and have published guidelines on how to improve this.
The Body Shop
Peter O’Byrne provided terrific insights into the recent developments in board composition at The Body Shop. Peter explained that in the context of The Body Shop, sustainability and ethical concerns were built into the company from its incorporation due to its founder, the late Dame Anita Roddick, believing that social and environmental dimensions should be woven into the fabric of the company. This is evident in The Body Shop’s multiple streams of activism on matters both directly relating to the beauty industry and other streams globally.
The Body Shop’s approach stakeholder governance
Peter explained how the Body Shop joined the Natura & Co Group in 2017 which is the world’s largest B-Corporation (B-Corp). B-Corps are companies that are certified in meeting high standards in social and environmental performance; re-certification is required periodically; certification in the UK is built on a stakeholder engagement framework being set up within the company. The legal team of The Body Shop where heavily engaged in the B-Corp certification process, which included changes to the Articles of Association of The Body Shop.
The Body Shop’s ‘Commitment to Life’ initiative is key to their stakeholder governance framework. Launched in 2020, this commitment sets out a number of goals for The Body Shop to achieve by 2030. These goals aim to address the climate crisis and protect the Amazon in Brazil whilst also defending human rights and human kind – one of their commitments is to ensure 50% of women on boards and senior teams within The Body Shop as well as 30% inclusion in management of underrepresented groups.
Board composition and related initiatives
The Body Shop has recently launched two initiatives aimed at improving youth representation in board rooms and in wider society. These are the ‘Be heard, Be Seen Campaign’ and the ‘Youth Collective Initiative’.
The ‘Be Seen, Be heard’ campaign was set up in response to the societal issue that young people are excluded from decisions that will affect their future. The campaign is a three-year collaboration with the United Nations with the aim to amplify young voices in public life in over 70 countries, with objectives tailored locally. In some countries the campaign is aiming to lower the voting age and in other countries it is aiming to remove barriers for people to participate in public life and to increase youth representation by establishing formal youth bodies.
The overall goal of the campaign is to change one policy or one piece of legislation in each participating country. The impact of the campaign can already be seen in New Zealand with a petition to lower the voting age to 16 being adopted by a member of parliament to raise in the NZ parliament. The Body Shop recently participated in panels at COP27 to promote the campaign.
The Youth Collective Initiative is a group of 12 people under 30 from inside and outside The Body Shop with a focus on having their voice included in board and management decision making. The CEO of the Body Shop is the sponsor of this project to ensure top-down commitment and support. The group meet with the executive management team of The Body Shop to discuss various elements of The Body Shop’s business.
Peter informed us that in terms of looking ahead, The Body Shop will continue to challenge themselves in activism and will continue with their ‘Commitment to Life’ 2030 goals. The role of the General Counsel and the legal team is to support all aspects of The Body Shop’s initiatives and Peter described the impact of a focus on ESG matters by saying that the questions for legal teams is no longer whether it is just legal, but whether it is right or correct to make a particular decision. This attitude to decision making is how The Body Shop show their commitment to live up their founder’s vision as a force for good in the world.
1 These are the most recent figures from July 2022, as provided by The Female FTSE Board Report 2022 in November 2022. These are an update from the figures presented in the Webinar (which were 39.1% and 36.8% for the FTSE 100 and FTSE 250, respectively).